Uncompensated Care Falls to Lowest Level in 25 Years

Rich Daly, HFMA Senior Writer/Editor

Jan. 4—Uncompensated care costs in 2015 were the smallest share of hospital costs in at least 25 years, a leading industry group recently found.

Hospitals’ uncompensated care costs (UCC) were 4.2 percent of total expenses in 2015, which was down from 5.3 percent in 2014, a recent
report from the American Hospital Association (AHA) found. The $35.7 billion in 2015 UCC was the lowest amount since 2007, when the total was $34 billion.

“The hospitals in general—there are exceptions—are doing better than they have in years and years,” Paul Hughes-Cromwick, co-director of the Center for Sustainable Health Spending, said in an interview.

The findings followed an Obama administration
estimate that the insurance coverage provisions of the Affordable Care Act (ACA) reduced hospital UCC by $7.4 billion in 2014. The coverage increase includes nearly 17 million additional enrollees in Medicaid or the Children’s Health Insurance Program since October 2013, and 8.8 million enrollees in the ACA marketplaces
since open enrollment for 2017 started Nov. 1.

A recent
report prepared for AHA estimated the ACA reduced hospital UCC among the newly insured by $14.6 billion in 2015. The annual UCC reduction was expected to reach $34.3 billion by 2026.

Underpayments
Increase

The good news regarding UCC was tempered somewhat by another recent AHA
report that found Medicare and Medicaid payments were $57.8 billion less than the costs of providing care to those patients in 2015. That total was $6.8 billion, or 13 percent, more than the amount of such “underpayments” in 2013, as
reported by the AHA.

The surge in losses appeared to be driven by Medicaid, where the shortfall increased 23 percent, from $13.2 billion in 2013 to $16.2 billion in 2015. Medicare underpayments increased 10 percent, to $41.6 billion.

Hughes-Cromwick said Medicare hospital rates are likely adequate, but “you can probably make the case the Medicaid rates should be a little higher.”

The Medicaid underpayment findings echoed a December Health Affairsstudy.

In that study, 2011 audit data from 2,475 Medicare disproportionate share hospitals (DSH) showed that hospitals were generally reimbursed about 108 percent of total costs for treating Medicaid patients. But when state taxes and required government fees were included, net Medicaid payment averaged 89
percent of all Medicaid costs.

The growing Medicaid shortfall “shouldn’t surprise anyone because the level of enrollment in the Medicaid program has gone way up by approximately 15 million people,”
said James Teisl, a study co-author and director of the Berkeley Research Group in Washington. “If each Medicaid patient that you are treating covers between 90 and 100 percent of costs, there’s a shortfall associated with each one. If you add 15 million more
people, that’s 15 million more shortfalls that a hospital realizes.”

Teisl noted that the increased Medicaid shortfall was offset by the big drop in UCC. That financial advantage was more concentrated in the 31 states that expanded Medicaid eligibility, as authorized by the ACA, according to data from the Medicaid and CHIP Payment and Access Commission
(MACPAC). Additionally, UCC decreases in expansion states ($5.8 billion) greatly outstripped Medicaid losses ($0.9 billion), according to MACPAC
data.

Other research has concluded that Medicaid can be a net moneymaker for hospitals. For instance, another recent
study found that supplemental Medicare reimbursement programs that use Medicaid days to determine payments can make Medicaid hospital admissions profitable for safety-net hospitals.

The overall Medicaid figures also obscure the range of differences among states in how they pay for Medicaid services, Teisl said.

Overall, the share of hospitals receiving payments for less than the cost of caring for patients covered by Medicare or Medicaid fell slightly from 2013 to 2015.

Although details of Republican plans to repeal and replace the ACA remain far from settled, some hospital advocates have expressed hope that the replacement will restore DSH payments, which help offset UCC losses and which were cut by the ACA. A Republican repeal bill that was vetoed last
year restored the DSH funding, which would provide hospitals with nearly $103 billion in additional payments over the next nine years.

“That’s the expectation of what will happen, but nothing is guaranteed until we see the bill text,” Teisl said.

Improvements Needed

The mixed financial picture for hospitals comes on the heels of a
report by the Congressional Budget Office (CBO), which predicted the share of unprofitable hospitals will increase from 27 percent in 2011 to as many as 60 percent by 2025.

The deteriorating financial picture stems from productivity cuts that were included in the ACA and many of which are expected to remain in any replacement bill. If hospitals are unable to improve productivity or cut costs, average profit margin will fall from 6 percent in 2011 to as low as -0.2
percent by 2025, according to CBO.

To keep profit margins at their 2011 levels, hospitals would have to improve their efficiency by an additional 0.2 to 0.5 percent through either increases in revenues or reductions in costs.

Although hospitals have long struggled to improve productivity, a 2015
study in Health Affairs found hospitals experienced higher productivity growth from 2002 to 2011 than previously thought.

Some observers hailed those findings as indicative that hospitals can increase their productivity enough to keep up with productivity improvements in the overall economy and compensate for the ACA’s cuts in Medicare rates.

Recent
data boosted the notion that hospitals are becoming better at controlling costs. Hospital price growth slowed to 0.9 percent in 2015—the lowest increase since 1998—according to data from the Office of the Actuary for the Centers for Medicare & Medicaid Services (CMS).

Additionally, a rough measure used by the Altarum Institute to measure productivity—the difference between utilization and job growth—has improved 6 percent since 2005, with much of the improvement coming since 2013.

“You can get it by hospitals taking out lots and lots of costs, and it’s not showing up in any negative [clinical outcomes] ledger,” Hughes-Cromwick said. “So there’s abundant evidence for increases in productivity.”

Jan. 4—Uncompensated care costs in 2015 were the smallest share of hospital costs in at least 25 years, a leading industry group recently found.

Hospitals’ uncompensated care costs (UCC) were 4.2 percent of total expenses in 2015, which was down from 5.3 percent in 2014, a recent
report from the American Hospital Association (AHA) found. The $35.7 billion in 2015 UCC was the lowest amount since 2007, when the total was $34 billion.

“The hospitals in general—there are exceptions—are doing better than they have in years and years,” Paul Hughes-Cromwick, co-director of the Center for Sustainable Health Spending, said in an interview.

The findings followed an Obama administration
estimate that the insurance coverage provisions of the Affordable Care Act (ACA) reduced hospital UCC by $7.4 billion in 2014. The coverage increase includes nearly 17 million additional enrollees in Medicaid or the Children’s Health Insurance Program since October 2013, and 8.8 million enrollees in the ACA marketplaces
since open enrollment for 2017 started Nov. 1.

A recent
report prepared for AHA estimated the ACA reduced hospital UCC among the newly insured by $14.6 billion in 2015. The annual UCC reduction was expected to reach $34.3 billion by 2026.

Underpayments
Increase

The good news regarding UCC was tempered somewhat by another recent AHA
report that found Medicare and Medicaid payments were $57.8 billion less than the costs of providing care to those patients in 2015. That total was $6.8 billion, or 13 percent, more than the amount of such “underpayments” in 2013, as
reported by the AHA.

The surge in losses appeared to be driven by Medicaid, where the shortfall increased 23 percent, from $13.2 billion in 2013 to $16.2 billion in 2015. Medicare underpayments increased 10 percent, to $41.6 billion.

Hughes-Cromwick said Medicare hospital rates are likely adequate, but “you can probably make the case the Medicaid rates should be a little higher.”

The Medicaid underpayment findings echoed a December Health Affairsstudy.

In that study, 2011 audit data from 2,475 Medicare disproportionate share hospitals (DSH) showed that hospitals were generally reimbursed about 108 percent of total costs for treating Medicaid patients. But when state taxes and required government fees were included, net Medicaid payment averaged 89
percent of all Medicaid costs.

The growing Medicaid shortfall “shouldn’t surprise anyone because the level of enrollment in the Medicaid program has gone way up by approximately 15 million people,”
said James Teisl, a study co-author and director of the Berkeley Research Group in Washington. “If each Medicaid patient that you are treating covers between 90 and 100 percent of costs, there’s a shortfall associated with each one. If you add 15 million more
people, that’s 15 million more shortfalls that a hospital realizes.”

Teisl noted that the increased Medicaid shortfall was offset by the big drop in UCC. That financial advantage was more concentrated in the 31 states that expanded Medicaid eligibility, as authorized by the ACA, according to data from the Medicaid and CHIP Payment and Access Commission
(MACPAC). Additionally, UCC decreases in expansion states ($5.8 billion) greatly outstripped Medicaid losses ($0.9 billion), according to MACPAC
data.

Other research has concluded that Medicaid can be a net moneymaker for hospitals. For instance, another recent
study found that supplemental Medicare reimbursement programs that use Medicaid days to determine payments can make Medicaid hospital admissions profitable for safety-net hospitals.

The overall Medicaid figures also obscure the range of differences among states in how they pay for Medicaid services, Teisl said.

Overall, the share of hospitals receiving payments for less than the cost of caring for patients covered by Medicare or Medicaid fell slightly from 2013 to 2015.

Although details of Republican plans to repeal and replace the ACA remain far from settled, some hospital advocates have expressed hope that the replacement will restore DSH payments, which help offset UCC losses and which were cut by the ACA. A Republican repeal bill that was vetoed last
year restored the DSH funding, which would provide hospitals with nearly $103 billion in additional payments over the next nine years.

“That’s the expectation of what will happen, but nothing is guaranteed until we see the bill text,” Teisl said.

Improvements Needed

The mixed financial picture for hospitals comes on the heels of a
report by the Congressional Budget Office (CBO), which predicted the share of unprofitable hospitals will increase from 27 percent in 2011 to as many as 60 percent by 2025.

The deteriorating financial picture stems from productivity cuts that were included in the ACA and many of which are expected to remain in any replacement bill. If hospitals are unable to improve productivity or cut costs, average profit margin will fall from 6 percent in 2011 to as low as -0.2
percent by 2025, according to CBO.

To keep profit margins at their 2011 levels, hospitals would have to improve their efficiency by an additional 0.2 to 0.5 percent through either increases in revenues or reductions in costs.

Although hospitals have long struggled to improve productivity, a 2015
study in Health Affairs found hospitals experienced higher productivity growth from 2002 to 2011 than previously thought.

Some observers hailed those findings as indicative that hospitals can increase their productivity enough to keep up with productivity improvements in the overall economy and compensate for the ACA’s cuts in Medicare rates.

Recent
data boosted the notion that hospitals are becoming better at controlling costs. Hospital price growth slowed to 0.9 percent in 2015—the lowest increase since 1998—according to data from the Office of the Actuary for the Centers for Medicare & Medicaid Services (CMS).

Additionally, a rough measure used by the Altarum Institute to measure productivity—the difference between utilization and job growth—has improved 6 percent since 2005, with much of the improvement coming since 2013.

“You can get it by hospitals taking out lots and lots of costs, and it’s not showing up in any negative [clinical outcomes] ledger,” Hughes-Cromwick said. “So there’s abundant evidence for increases in productivity.”

HFMA RESOURCE LIBRARY

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